Q1 2024 Macroeconomic snapshot: Comparing Canadian and U.S. economic performance

While interest rates have gone up at about the same pace in the U.S. and Canada, the associated drag on the economy has clearly been more pronounced this side of the border. Just look at what happened last year as Canada’s GDP growth was restricted to 1.1%, well below the 2.5% growth print stateside. The performance gap was entirely due to domestic demand, particularly interest-rate-sensitive components of GDP, namely housing, consumption spending and business investment. And with rates likely to stay elevated for a while, it’s difficult to see Canada making up lost ground on the U.S. in 2024. On the plus side, continued U.S. economic expansion should translate into decent exports for Canadian Ag producers and food and beverage manufacturers.

Heavier debt service burden in Canada
Nobody should be surprised that high interest rates bite harder this side of the border. Canadians not only have higher debt loads than Americans but that debt also renews more regularly e.g., mortgage terms in Canada generally do not exceed 5 years while in the U.S. it’s not uncommon to find 30-year mortgages. All of that means that the household debt burden is heavier in Canada.

Note that more than 15% of disposable income goes towards servicing debt in Canada, while in the U.S. the debt service ratio is less than 10% (Figure 1). The debt service burden was similar in both countries back in 2005, but since then there’s been a sharp divergence as the Financial Crisis of 2007/08 (and resulting collapse of the U.S. housing market) prompted massive household deleveraging in America, while Canadians went the other way, piling on debt in synch with a soaring housing market.

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